EIM21728 | Particular benefits: heating, lighting, cleaning etc. expenses of job-related living accommodation: 10% limit: example of calculating the net amount of the earnings: employee makes good part of the expense of providing the benefits:

From HM Revenue & Customs · Employment Income Manual

This page is only relevant for the tax year 2015 to 2016 and earlier.

This example shows the interaction between:

the 10% restriction and
the calculation to determine whether an employee is in lower-paid employment.

The employee’s salary is £7,500 a year.

The employer paid a medical insurance premium of £450 in respect of the employee during the year.

The employee is entitled to a deduction of £200 for expenses within section 336 ITEPA 2003 (see EIM31620 onwards).

The employer paid £1,250 during the year for heating and lighting of the job-related living accommodation, but the employee reimbursed the employer £325 of this expense. So, the net cost to the employer was £925 (£1,250 − £325).

The calculation to see whether the employee is in lower-paid employment is:

Salary plus medical benefit = £7,950 (£7,500 + £450)

Heating and lighting:

Salary plus medical benefit = £7,950
Minus deduction due under section 336 = £200
Total = £7,750
£7,750 × 10% = £775
Minus amounts made good = £325
Total = £450

£450 is less than the net cost of £925, therefore:

Total = £8,400 (£7,950 + £450)

The total earnings before deducting the expenses of £200 are less than £8,500 so the employee is in lower-paid employment. So the medical premium and the heating and lighting are not chargeable as benefits. The amount of employment income is:

Salary = £7,500
Allowable expense = £200
Employment income = £7,300

Note that when working out whether an employee is in lower-paid employment, the 10% restriction of net earnings can limit the amount to be included as a benefit.

If the employee had not made good the £325 of the employer’s expenditure on heating and lighting, he would not have been in lower-paid employment because the total emoluments would have been £8,725 (£8,400 + £325).

The amount of his employment income would have been:

Salary plus medical benefit = £7,950 (£7,500 + £450)
Minus deduction due under section 336 = £200
Total = £7,750

Heating and lighting:

£7,750 × 10% = £775

£775 is less than the net cost of £1250, therefore:

Total = £8,525 (£7,750 + £775)